ICICI_Debt Market Outlook (Jan)_110117 - ICICI Prudential Mutual Fund

Dec 31, 2016 - Gilts were primarily affected by the RBI's decision to keep interest rates ... other hand, financial savings have witnessed an unprecedented spurt since 2013. ... Current Account Balance and Crude Oil Movement for calculation. ... The Fund aims to generate total return with emphasis on high credit quality.
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FIXED INCOME

Credit Markets Our Outlook A credit ratio in first half of FY17 has improved to 2 times, this is among the highest in last 5 years. This improvement goes on to show that the credit cycle has bottomed out. With the commodity prices being stable, commodity-led businesses and financial companies that were heavily invested in these sectors will witness further improvement. As capacity utilisation is low, we do not expect further investment in capital expenditure, thus, these companies are expected to repay their loans and reduce debt, thereby improving the balance sheet. Credit profile of many corporates has been improving and we have witnessed upgrades in our portfolios of companies engaged in various sectors. Therefore, it reflects that economic recovery cycle is well underway, and that the credit market is gradually improving. Source: CRISIL

Money Markets Our Outlook Money markets rates have risen in the course of last one month. Certificate of Deposit (CD) across maturities saw rise in rates of around 5 to 23 bps, whereas Commercial Papers (CP) saw sharp rise in the 3, 6 and 12 months segment of around 25 to 40 bps. The rates spiked because of events like Monetary Policy stance, Fed Rate hike and improved macro-economic data in the USA. Average liquidity was in surplus at Rs 1.53 Lakh Cr. vis-a-vis the surplus of Rs 1.43 Lakh Cr. in November 2016. Going forward we expect money market rates to stay low amidst surplus liquidity. Source: RBI, CRISIL Centre for Economic Research (CCER)

Fixed Income Outlook Government bond prices declined during the month, with the yield on the 10-year benchmark – the 6.97%, 2026 paper – advancing to 6.51% on December 30, 2016, compared with 6.24% on November 30, 2016. Gilts were primarily affected by the RBI’s decision to keep interest rates unchanged and as the minutes of the Monetary Policy Committees (MPC’s) meeting dampened expectations of interest rates being lowered in the near term. Gilts were dented further, after the US Federal Reserve hiked its key rates and suggested that it could tighten its monetary policy at a more aggressive pace than was previously expected. The dot plot of interest rate estimates from the committee members suggest that a cumulative increase of 75 bps could be in store for 2017, as against 50 bps implied earlier. Subdued appetite for debt ahead of the year-end also weighed on prices.

However, a further decline in gilts was halted on the back of intermittent value buying, favourable domestic consumer inflation figures, comfortable liquidity situation and expectation of firm demand for dated securities at a weekly debt sale. Bonds were also supported after the RBI announced that the incremental CRR requirement would be withdrawn from December 10, 2016. Historically, fixed income space has generated returns during the process of deleveraging. In line with this view, we believe that the outlook for fixed income is expected to be reasonably good for the next six to twelve months. Furthermore, we believe that more investors are likely to turn to fixed income schemes as traditional investment avenues could lose their lustre. Over the last five years, gold has given negative returns in US dollar terms while real estate too has hardly delivered any returns globally. On the other hand, financial savings have witnessed an unprecedented spurt since 2013. We believe monetary policy has turned more accommodative under the new Governor and the monetary policy committee (MPC). Further, the impact of demonetisation might not be transitory and with continued soft inflation, only a modest recovery in growth, weak private capex (capital expenditure), and a healthy Balance of Payment (BoP) position, RBI could cut interest rates. We believe most part of the fixed income rally has already played out and returns are expected to be moderate from hereon. However, over next three year period Fixed Income may continue to deliver reasonable post tax returns relative to traditional fixed income investment avenues. New invest